Cointegration Analysis of Commodity Prices: Much Ado about

36 Pages·2010·0.9 MB·English

Cointegration Analysis of Commodity
Prices: Much Ado about the Wrong
Thing?
Mindy L. Mallory and Sergio H. Lence
September 17, 2010
Cointegration Analysis, Commodity Prices
• What is cointegration analysis?
9
8
7
6
5
4 Ethanol
Corn
3
2
1
0
Cointegration Analysis, Commodity Prices
• How do we use cointegration analysis?
– Spatial Arbitrage
– Law of One Price
– Trade Conditions
– Purchasing Power Parity
– Farm-Retail, Retail-Farm Price
Transmission
Cointegration Analysis, Commodity Prices
Two Basic Approaches
• Error Correction Type • Residual Based Models
Models
– Include an equilibrium term
– Test for unit root in the
in a VAR type model
residuals of a regression of
one variable on the others
Cointegration Analysis, Commodity Prices
• Residual Based Models
– Test for unit root in the residuals of a
regression of one variable on the others
x = β + βx + βx +ε
1t 0 1 2t 3t t
Cointegration Analysis, Commodity Prices
• Residual Based Models
– Test for unit root in the residuals of a
regression of one variable on the others
x = β + βx + βx +ε
1t 0 1 2t 3t t
pcorn = β + β pethanol + βpnatural gas +ε
t 0 1 t t t
Cointegration Analysis, Commodity Prices
• Residual Based Models
– Test for unit root in the residuals of a
regression of one variable on the others
x = β + βx + βx +ε
1t 0 1 2t 3t t
pcorn = β + β pethanol + βpnatural gas +ε
t 0 1 t t t
Cointegration Analysis, Commodity Prices
• Error Correction Type Models
– Include an equilibrium term in a VAR type
model
∑k−1
∆X =αβ' X + Γ ∆X + e
t t−1 i t−i t
i=1
Cointegration Analysis, Commodity Prices
• Error Correction Type Models
∆pc   pc  ∆pc 
t t t−1
     
∆peth =αβ' peth + ∑Γ ∆peth + e
     
t t t−1 t
     
∆png png ∆png
     
t t t−1